*This paper focuses on many nations. It analyzes the regulations of each country and more. This could be reproduced for various states in the US to map out the environments seen across the US for the industry.

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*

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*In order to eliminate all the effects of various regulatory climates, I could focus on just MI. This might skew the results however because there would be no comparison

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*Electric utilities have very high politicization and sunk costs

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*3 features of the industry:

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:#large, specific, sunk costs

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:#important economies of scale/scope (few suppliers)

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:#outputs are largely consumed (politicians will care about the level of pricing)

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*Levy and Spiller 1994 have a design used to analyze the interactions of the institutions, the regulations, and the performance of a country. This is used. Could this be adapted for U.S. States?

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Utility CEO Pay

From Wikipedia: Electric Utility
"The compensation received by the executive in utility companies often receives the most scrutiny in the review of operating expenses. Just as regulated utilities and their governing bodies struggle to maintain a balance between keeping consumer costs reasonable and being profitable enough to attract investors, they must also compete with private companies for talented executives and then be able to retain those executives."

Why CEO Utility Pay?

CEO, or Chief Executive Officer, salary has risen dramatically over the past two decades. Utility companies are found to pay their CEO's significantly less than their private counterparts. This is being investigated to determine the chief reasons CEO's in the electrical utility industry seem to be paid less, and discover if their pay is justified.

Factors of CEO Pay

There are several generally agreed upon components to a CEO's salary:

Base Salary

Incentive Pay, Short Term (i.e., bonus)

Incentive Pay, Long Term (i.e., stocks)

Benefits (i.e., Cars, Health Care, Retirement)

Running Notes and Ideas

This is a collection of ideas I develop while conducting the literature review. Comments and edits, as well as new ideas are appreciated here.

Why do CEOs in utilities make less? should they be making more?

Gather data on many firms from both electric utilities and non-regulated industries.

Use this data (firm size, stock price, etc.) in minitab to discover what variable are more significant in calculating the pay of a CEO for both industries.

use minitab to see if utility industries pay more with salary/bonus or stock options than non-regulated firms.

Research how compensation contracts are designed

compare CEO compensation before the major deregulation and post deregulation, economy growth, etc. See if the compensation has increased in a way that reflects the amount it should have increased with deregulation and economic growth.

compare how solar effects CEO pay

Based on other paper I know what factors affect CEO pay. I can compare current utility company conditions to past conditions and to non-utility conditions. If utility companies have grown closer to non-utility companies recently, the CEOs should be paid closer to the industry standard. if the opposite, they should be paid less or equal.

Literature Review of CEO Utility Pay

Electric Utility Compensation

Executive Compensation and Corporate Performance in Electric and Gas Utilities

measures of organizational structure(utility annual reports, 10k filings, financial analysts' reports. if it is organized as an exempt holding company and if it has diversification into non regulated industries.)

Regulatory and Political Environment:

Salomon Brothers' Rankings

residential and industrial rate change

characteristics of each states regulatory agency(annual issues of the National Association of Regulatory Utility Commissioners' annual report on utility and carrier regulation, 1978-1990.

CEO compensation results:

paid less when their firms regulatory environment favors consumers

Paid less when rates are high or rising rapidly (mostly residential)

paid less when their state has an elected commissioner

CEO Compensation in a Regulatory Environment: An Analysis of the Electric Utility Industry

Political Institutions and Electric Utility Investment: A Cross-Nation Analysis

This paper focuses on many nations. It analyzes the regulations of each country and more. This could be reproduced for various states in the US to map out the environments seen across the US for the industry.

In order to eliminate all the effects of various regulatory climates, I could focus on just MI. This might skew the results however because there would be no comparison

Electric utilities have very high politicization and sunk costs

3 features of the industry:

large, specific, sunk costs

important economies of scale/scope (few suppliers)

outputs are largely consumed (politicians will care about the level of pricing)

Levy and Spiller 1994 have a design used to analyze the interactions of the institutions, the regulations, and the performance of a country. This is used. Could this be adapted for U.S. States?

random control group of manufacturing firms (SIC codes 2000-3999 from Standard and Poor's compustat)

schooling, tenure w/ firm, tenure w/ CEO, previous jobs, etc. are all found in MArquis's Who's Who in finance and industry, Dun and Bradstreet's Reference book of corporate managements, and the standard and poor's registar of corporations, directors, and executives.

all CEO compensation variables are obtained from the annual proxy statements filed by firms with the SEC.

Tobin Q values were calculated

Utilities tend to have larger capital expenditures

Utilities also have lower research and development expenses.

Utilities have a lower pay-performance sensitivity than unregulated firms.

Deregulation and environmental differentiation in the electric utility industry

How deregulation can impact firm strategies and environmental quality in electric utilities

After deregulation, it is found that firms "differentiate" themselves. ie. firms in areas with customers who want green power will promote the manufacture and sale of green power techniques. Firms with customers who want the cheapest energy will strive to lower costs

Regulation bottled all the different types of customers into one. After regulation, the firms branched out

Deregulation Laws passed:

Public Utility Regulatory Policies Act (PURPA) in 1978

Energy Policy Act of 1992

Individual states started deregulation: California first, then many more states including Michigan. (Table 1)

US Department of energy was used to generate statistics on sales of green power

Trying to calculate Change in % of generation from renewables from variables like Deregulation, Environmental Sensitivity, Percentage of generation from coal, efficiency

Managerial Pay and Corporate Performance

This paper is trying to examine the question of whether the financial rewards reaped by high level corporate executives are more strongly influenced by company performance as measured by total corporate revenues or as measured by either of two standards of shareholder welfare.

trying to include all relevant pay packages; cash salary and bonus, indirect, deferred, and contingent compensation

data from 1942-1963, 3 year intervals

basic model relates compensation to corporate sales and profits

p715 defines all variables in a nice table

Strong support for "top management's remuneration is heavily dependent upon the generation of profits"

reported profits have a strong and regular influence on executive rewards. sales have little influence on rewards

profits and equity market values are more important in the determination of compensation than sales

This paper concludes that large companies today can still be modeled by profit maximization models rather than a sales maximization model.

Performance Pay and Top-Management Incentives

Additionally to the more common incentives added to CEOs compensation, this paper included "Threat of Dismissal." This shows the CEOs general incentive to not be fired also plays a factor in the way they behave

Discussion on the feasibility of pay to performance sensitive contracts:

May not be feasible

Executives with limited resources will not commit to a contract with a high performance based pay, for fear of low pay

Shareholder might not want to commit to a high performance based pay for fear of too high a pay

Deregulation and the adaptation of governance structure: the case of the U.S. airline industry

The airline industry is relevant because it was a regulated industry like electric utilities, but was deregulated in 1978, so it shows a before and after picture of regulation. By comparing the industries more can be learned about the effects of regulation on an industry

after deregulation:

equity ownership has a higher concentration

CEO compensation increases

CEOs stock option grants increase

boards grow smaller

CEO turnover increases

insider holdings and cash compensation do not change

gradual changes in governance structure

data from 1971-1992

the deregulation act removed all price and entry restrictions to the industry

Surviving firms of deregulation were found to have adapted compensation policies quicker than the failing firms

New firms entering the industry after deregulation had smaller board size, greater representation from outsiders, and more equity based pay

Table 1 shows data from before and after the act. Airlines has a significant increase in delisted firms after.

the amount of firms that were taken over or went bankrupt were much higher in the airline industry than the electric utility industry during this time frame.

the average levels of CEO ownership vary a lot over the three different industries (unregulated, airline, regulated or electric utilities) but very little within each industry

ownership amounts:

Unregulated - 20%

Airline - 14%

Regulated or electric utilities - 1%

Fig 2 shows graphs on compensation for each industry over a time period

Meta-analysis has strengths such as scientific rigor, little bias in the choice of studies included, objective weighting of studies, allowing moderating variables, allowing estimations of relationship stability, and more. PErformed using the Schmidt-Hunter Method

managers have potential to "generate rents," or generate increases in company value/pay, using their human capital, they must put in the effort and ensure it is focused in the right place for this to occur however

Differences in managerial skills lead to differences in the variability of firm performance

Industry specific human capital commands a premium in industries in the early stages of the product-life cycle, relative to industry specific capital in more mature industries

following changes in industry and technological conditions, the composition of managerial human capital changes withing firms and industries, as companies alter the types of managers that they hire, fire, promote, and compensate highly.

Firms in regulated industries more frequently hire and promote managers with industry specific human capital than do firms in unregulated industries

Following industry deregulation, the amount and quality of generic managerial human capital in the industry increases.

Industries with characteristics that allow greater managerial discretion attract managers with higher quality human capital on average than do industries with less latitude for managerial discretion.

Superior managerial human capital in industries that allow for greater managerial discretion leads to better firm performance than in other industries

Following changes in economic conditions, the composition of managerial human capital changes within firms, as companies alter the types of managers that they hire, fire, promote, and compensate highly.

managers with superior skills receive above-average compensation

Managers that take firms private are more likely to have greater firm-specificity of skills than managers in other firms

differences between firms in the human capital of boards of directors are related to differences in strategic actions and performance.

Pay for performance? Government regulation and the structure of compensation contracts

in 1992/93 the SEC and congress increased regulation and visibility on CEO compensation of large firms. They are now given less tax breaks on non performance based pay and are required to report more information

Propositions investigated:

CEO compensation levels decrease following the adoption of 162(m) (the regulations) and the SEC disclosure changes

All compensation components increased over the period, showing that the regulations did not change overall CEO pay levels

The regulations may have put pressure to slow growth or decrease salary of larger firms

Salaries above or nearing the million-dollar range are less likely to increase than salaries below the million-dollar mark.

only suggestive results that this may be the case. nothing conclusive

Firms reduce salaries above 1 million dollars because of the regulations

The findings show that the regulations did not significantly cut salaries (some did get cut citing the regulations, but many went up)

Salaries nearing the million-dollar range increase less than salaries below the million-dollar range.

Salaries close to the mark have lower growth rates

Performance sensitive components of compensation, such as bonus and stock-based compensation, have become more important after 1993

Trends seem to be consistent, no quantitative values

Increased shareholder scrutiny through enhanced disclosure and 162(m) will lead to an increase in the sensitivity of pay to performance after 1993, especially for firms subject to 162(m)

CEO tenure is unrelated to bonus and total comp. Firm size (ln of total assets) is proportional to total comp but not bonus

sensitivity does increase

After the regulations, the change in CEO wealth per dollar change in shareholder wealth increases, especially for million-dollar firms

Calculate with Jenson-Murphey statistic

This is true

Tax paying firms should be more sensitive than non tax paying firms

CEO performance is measured by firms in ways including:

net income

net profit

Profit minus nonreoccuring events

Earnings per share

sales

return on equity (ROE)

shareholder returns

cash flows

Return on assests (ROA)

Profit Margin

dividends

The regulations did not affect CEO comp growth, but did affect the structure. CEO comp is more sensitive to shareholders wealth now

Economic consequences of the Sarbanes–Oxley Act of 2002

The act requires more oversight, increases penalties for manager misconduct, and addresses conflicts of interest.

Tries to reduce/prevent accounting and managerial misbehavior

Hypothesis:

If SOX(the act) imposed net costs on the U.S. firms, firms' cumulative returns adjusted for the impact of contemporaneous economic news around the SOX rule making events would be negative.

If the restriction on auditor's provision of non-audit services imposed net costs on firms, firms purchasing more non-audit services prior to SOX would incur greater costs and experience more negative cumulative abnormal returns around the SOX rule making events.

If the governance provisions of SOX imposed net costs on firms, firms with corporate governance structure weaker than optimum would incur more costs and experience more negative cumulative abnormal returns around the SOX rulemaking events

If section 404 imposed net costs on firms, firms with more complex business would incur greater costs and experience more negative cumulative abnormal returns around the SOX rulemaking events

If deferment of section 404 compliance was beneficial, firms that obtained a longer extension period would experience more positive abnormal returns than firms that were required to comply with section 404 earlier around the announcement of postponing the compliance dates

If the provisions on incentive pay and insider trading imposed net costs on firms, firms that use incentive-based compensation excessively would incur greater costs and experience more negative cumulative abnormal returns around the SOX rulemaking events.

The total abnormal returns of firms following SOX are negative

Does not show SOX being "costly" but blames insignificant events to lowering significance.

SOX appears to have a negative return but the results are inconclusive.

Governance is regulation over the executive like above. either internal or external regulation

increase in governance = decrease in compensation

Each firm must have the optimal amount of compensation/incentives and governance to control managers

Small firms tend to increase incentives

Large firms tend to increase governance

Executive compensation increases with firm size

Pay performance sensitivity(incentives) goes down with firm size

Governance and incentive pay are substitutes

Under regulation, CEO pay falls

Under governance, large firm's value increases and small firm's value decreases

More firms with talented managers take voluntary governance

If governance costs go up, governance decreases.

Because managers are a "product", if one firm has poor governance, and therefore high compensation costs, all other firms in the industry are pressured to increase incentive pay and therefore decrease governance.

The conclusion is a very good summary of everything

Peer choice in CEO compensation

Investigating that firms will report peer compensation values higher than their own CEOs. most research shows this is because they want to justify their CEOs salary. this article claims it is because it represents a reward for "unobserved CEO talent."

Fiscal year 2006

3 measures of CEO talent:

past abnormal performance

size of past firms managed

media coverage

CEO talent can also be measured with CEO fixed-effects

the peer pay effect mostly shows the need to pay CEOs more for their talent.

some evidence of self-serving behavior in play

CEO pay is more in line with tighter labor markets than with managerial entrenchment or weak corporate governance.

A comparison of CEO pay-performance sensitivity in privately-held and public firms

Studies CEO contracts on private and public firms over the years 1999-2011.

This source is mostly focused on private firms. It does not give reasons for its findings. Minimally applies to electric utility compensation

Conclusions:

CEOs in public firms are paid 30% more than CEOs in (comparable) private firms.

CEO pay in both firm types is proportional to firm accounting performance.

pay performance link is stronger in public than in private firms

Hypotheses:

H1: The shareholder monitoring hypothesis: CEO pay performance sensitivity is weaker in privately held firms than in public firms

H2: :*The CEO power hypothesis: CEO pay performance sensitivity is stronger in privately held firms than in public firms

CEO total compensation is given as the total of salaries, bonuses, grant date value of restricted stock awards, and grand date Black-Scholes value of granted options, and other pay (premiums for insurance policies and medical expenses).